Here appear occasional jottings of my random musings. Profound or jejune, they reveal the contours of my mental universe, with world history, intellectual history, civilizations, philosophy, religion, society, knowledge, and books as some major themes.
Since May 2011, this blog has been exclusively focused on Singapore. All my other reflections are now posted in "Notes from Noosphere" (see link under "Miscellany" on the right margin).

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Thursday, April 12, 2012

Prof Lim Chong Yah's warning on the Singapore economy

Professor Lim Chong Yah, who was a key architect of the economic
restructuring exercise that overhauled Singapore’s wage system in the late 70s,
said that the growing income inequality is approaching dangerous levels.

Prof Lim also noted Singapore’s over-dependence on cheap foreign labour. He
said that Singapore now ‘needs shock therapy to wake up its economy’ and ‘the
only way out is to restructure again’, in the area of wages of low earners.

Prof Lim is the Albert Winsemius Chair Professor of Economics at the Nanyang
Technological University. He advocates for workers’ training and equitable wages
and chaired the National Wages Council from 1972 to 2001, during which real
wages grew at an average of 4.6% per year. He helped mastermind an economic
shake-up from 1979 to 1981 that lifted wages for workers and helped Singapore
move from a ‘low-skilled, low-value added and highly labour-intensive structure’
to one that used more technology and knowledge.

He attributed the opening of floodgates to foreign labour, to Singapore’s
fear of being uncompetitive. The result was that the non-resident labour force
increased from 300,800 in 1991 to 1.2 million last year, out of which only 1.7
per cent earned wages high enough to pay income tax. Not surprisingly, GDP
expanded impressively during this period.

More worrying is the growing income inequality in Singapore, as measured by
the Gini coefficient, which Prof Lim highlighted. Singapore was at 0.473 last
year, perilously close to the danger 0.5 mark, ‘normally considered a dangerous
line to reach, far less to cross’.

Income inequality has worsened as global forces pull up the highest income
groups while cheaper foreign labour which has been flooding Singapore, pulls
down the lowest income groups.

Prof Lim’s proposal, which he called ‘Economic Restructuring II’, includes
substantially increasing wages for the lowest-paid workers and freezing top
earners’ salaries for three years. He proposed that NWC should discuss such a
restructuring exercise process.

Prof Lim was speaking at a lecture given at the Economic Society of Singapore
yesterday evening (9 Apr). Prof Lim has made clear that he was merely expressing
his own personal views.

With regard to the timing of such an exercise, he felt that despite the weak
external economic condition, ‘this is the best timing’ for such a move given
Singapore’s low unemployment rate and strong fiscal position.

During an interview after the lecture, he told the media, “I have no
intention to destroy the investment climate. But if a company is
labour-intensive and needs to import cheap labour it may think twice. For
high-skilled companies that use a lot of technology, Singapore is still an ideal
place.”

Speaking at a conference held in conjunction with the launch of the NTU’s
Economic Growth Centre almost 7 years ago (26 Jul 2005), Professor Lim Chong
Yah, a key architect of the economic restructuring exercise that overhauled
Singapore’s wage system in the late 70s, warned the Government to tread
carefully on relying too much on cheap foreign labour [Link].

Prof Lim then said Singapore had done well economically since its
independence, leaping from a Third World country to a First World economy but it
might also have been “too free” in letting in cheap foreign labour.

He said, “Maybe we should not allow a too free flow of very low value-added
labour, very low-wage labour to Singapore.”

He added that such an “excessive supply would dampen the wage rate among the
lower income people”.

“That will create another problem… it will contribute to the development of a
very lowly paid sector in the economy, because we can get very cheap labour from
the region.”

So, the government should “maybe be a little more careful in allowing cheap
labour to move into Singapore in our pursuit of high growth”, he said. “Which
means that we cannot aim for very high growth… because if you aim for very high
growth, then you’d want to bring in a lot of labour from outside. Then only can you have very high growth.”

Unfortunately, this was precisely what the Government did in the next 6 years
or so by opening the floodgates to bring in a lot of labour from outside
stimulating “high growth” in Singapore.

This was in part due to the general success of the general election in 2006,
which “emboldened” the PAP Government. In the 2006 GE, PAP won 82 of the 84
seats with a respectable 66.6% votes (37 seats were won through walkovers).

With the full backing of the votes and seats won, PAP embarked on a huge
population expansion programme by massively importing foreign labour.

Between 2006 and 2011, the number of non-resident foreigners increased from
876K to 1.4 million (59% increase) while that of PRs increased from 418K to 532K
(27% increase).

The big increase in number of foreigners affected the quality of life for
Singaporeans, competing with Singaporeans in jobs and resources, and not to
mention depressing the wages of Singaporeans.

By 2011, Singaporeans were visibly fed-up with the PAP Government’s
over-liberal foreign labour policies. It showed in the general election of
2011.

Angry Singaporean voters began to speak out against PAP Government and voted
against the PAP. For the first time since the independence of Singapore, all the
constituencies were contested in 2011 GE with the exception of Tanjong Pagar GRC
which was walked-over due to technicalities – the opposition team was
disqualified as the nomination papers were submitted 35 seconds late. PAP scored
the lowest winning of % votes (60.1%) in the history of Singapore and lost 6
seats to the opposition.

Furthermore, also for the first time, PAP lost a GRC with two full PAP
cabinet ministers kicked out in an election. Not only that, three other PAP
cabinet ministers were indirectly affected. Even though the 3 have won the
election with low % votes, Raymond Lim, Wong Kan Seng and Mah Bow Tan, were
forced to step down due to public anger at their missteps in their respective
ministries. To appease the public, PM Lee even quickly formed a pay review
committee after the 2011 GE to look into lowering the ministers’ pays.

7 years later, at yesterday’s (9 Apr 2012) lecture given at the Economic
Society of Singapore, Prof Lim now made another observation and warned that the
Singapore’s growing income inequality is approaching dangerous levels. He said
that Singapore now ‘needs shock therapy to wake up its economy’ and ‘the only
way out is to restructure again’, in the area of wages of low earners.

He said, “I have no intention to destroy the investment climate. But if a
company is labour-intensive and needs to import cheap labour it may think
twice.”

Professor Lim Chong Yah’s “shock therapy” proposal brought back fond memories
of my time at the heart of national economic and manpower planning in the
Ministry of Trade and Industry. It was the early 1980’s. I was the secretary to
the late Dr Albert Winsemius, Singapore’s economic adviser, who visited us about
two times a year to review the economy. This was the time of the year when he
would advise on the government’s position at the annual National Wages Council
negotiations. I sat on the NWC as alternate member to my permanent secretary Mr
Ngiam Tong Dow, providing economic inputs to the Council which had
representatives from employers, trade unions and government. Prof Lim was the
chairman then.

We were candid with our analysis of the serious problem of severe manpower
shortages and the economy’s increasing reliance on lowly paid foreign workers.
Prof Lim was completely supportive of the proposal to restructure the economy by
raising wages substantially to dampen employers’ demand for lowly paid workers.
He succeeded most admirably in rallying the Council’s members including
employers’ representatives, behind the economic restructuring plan.

The high wages did not hamper economic growth as the GDP continued to grow at
around 10 per cent a year in the subsequent few years. When the regional
recession in 1985 hit Singapore badly, controls on the inflow of lowly paid
foreign labour were eased, resulting in a steady increase in the non-resident
workforce from 119,500 in 1980 representing a mere 7% of the total number of
workers, to 1,157,000 in 2011, a proportion of 35% of the overall labour force.
A whopping 5-fold increase in foreign worker dependency! Not surprising, wages
of the bottom 10 to 20 per cent of Singaporean workers stagnated or even fell.
As wages fell, profits went up, enabling companies to pay huge bonuses to their
top executives, further widening the income gap and magnifying the economic
inequality in society. What a double whammy – rising dependency on foreign
labour and falling wages of Singaporean workers, the exact opposites of the twin
objectives of economic restructuring that was started 33 years ago!

No wonder Prof Lim was frustrated and as one of the principal architects of
economic restructuring, had every right to be angry about the misdirection of
the economy. And anger was barely disguised behind his latest “shock therapy”
proposal which he described as Economic Restructuring 2. The approach of using
substantial wage increases is similar to that of the 1979 economic restructuring
but since the latter’s twin objectives had not been achieved to this day, his
“shock therapy” should rightly be described as Economic Restructuring Delayed 33
years!

I regard Prof Lim’s proposal of raising wages by 50% for workers earning below
$1500, and freezing the wages of those earning more than $15,000, as probably a
bit too broad-based and non-discriminatory. I prefer a targeted approach of a
minimal wage policy so as to reign in employers’ demand for cheap foreign
workers. At the same time, we should remove the current policy of allowing
foreign professionals to come to Singapore for twelve months to look for a job
as they could depress the wage levels of Singaporean professionals if the former
become desperate in their search for jobs.

As for fears that reducing the number of foreign workers would shrink the
size of the Singapore economy as companies reduce the scale of their operations
or even move out of Singapore, let me say that the government should not stand
idly by doing nothing but be proactive in promoting economic restructuring by
creating jobs and enterprise in a new Singapore economy. In my economic essay
published last year (http://tanjeesay.files.wordpress.com/2011/06/new_singapore_economy_-_summary_extract_15_feb_20114.pdf)
, I had proposed a $60 billion plan to regenerate the economy to provide jobs
that Singaporeans want and that will make use of their education and skills.
This National Regeneration Plan will more than make up for any shrinkage of
economic activities arising from a reduction of foreign workers.

A minimum wage policy and a $60 billion National Regeneration Plan are a bold
2-prong strategy to achieve a sustained and long lasting restructuring of the
Singapore economy that will benefit all Singaporeans. With our educated
workforce and huge fiscal reserves, we have the resources and a duty to our next
generation, to embark on this worthwhile journey now and not wait for another 33
years. And I say to the government, let’s do it!